“Sorry, We're Closed" Bank Branch Closures, Loan Pricing, and Information Asymmetries

109 Pages Posted: 19 Mar 2016 Last revised: 28 Sep 2020

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Gil Nogueira

New York University (NYU) - Department of Finance

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: September 28, 2020

Abstract

We study local loan conditions when, under external pressure, banks close branches. After the closure of nearby branches of their credit granting banks, firms that locally and hurriedly transfer to other banks receive an equivalent interest rate. However, and in stark contrast, where branch closures do not take place firms that purposely switch banks receive a 63 basis points discount. At the same time, the loan default rate for the (more expensive) transfer loans is on average a full percentage point lower than that for the (cheaper) switching loans. This suggests that firms that establish new relationships after their bank branch closes are “better” than regular switchers in terms of unobservable characteristics. Taken together, these findings provide evidence of losses for firms when banks close branches, even if local markets remain competitive.

Keywords: competition, banking sector, market structure

JEL Classification: G21, L11, L14

Suggested Citation

Bonfim, Diana and Nogueira, Gil and Ongena, Steven R. G., “Sorry, We're Closed" Bank Branch Closures, Loan Pricing, and Information Asymmetries (September 28, 2020). Available at SSRN: https://ssrn.com/abstract=2749155 or http://dx.doi.org/10.2139/ssrn.2749155

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Gil Nogueira

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Steven R. G. Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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